Dangers of a Dollar Collapse

As the Federal Reserve continues to monetize the money supply (quantitative easing) at a breakneck pace, nations around the world have become very concerned about their holdings of US dollars and dollar backed assets. The dollar at this point in time looks like it's virtually guaranteed to lose its status as the international reserve currency.

It's estimated that dollar holdings of foreign governments as exchange reserves totals $5,385 billion. From the CIA's World FactBook, the United States' holdings of foreign currencies is around $71 billion. Therefore, the US would not be able to counteract a mass exodus from the dollar. If this were to happen, the dollar's value would collapse to a mere fraction of its present worth.

US credit markets would collapse entirely. The Federal Reserve's quantitative easing would absolutely explode to buy trillions worth of debt in a vain attempt to hold down interest rates. The more debt the Fed would buy, the quicker the fall of the dollar would be and the more panicked the credit sell-off would become. Interest rates would soar.

Some countries around the world would be hurt badly by the dollar's collapse, as others would see benefits from the dollar's demise. United States retailers would be crushed. Those most heavily dependent on imports (i.e. Wal-Mart (WMT)) would be the first to go under. The price of gold and other precious metals would skyrocket. American lifestyles would be vastly and radically altered. The United States would experience hyperinflation.

Disclosure: No position.

Comments

[Dave Wrixon:]

Bravo. Somebody gets it.

Being the World's reserve currency is not a good thing at this point in time. It just provide much more opportunity to junk the dollar.

May 31 03:02 AM

[George Kesa...:]

Everyone forgets that the US is ahead of the curve as far as quantitative easing is concerned. When the ECB starts doing the same things (if not worse), then things will balance.

Let’s not forget the quantitative easing done by the Japanese all these years.

May 31 03:50 AM

[Bull Run:]

You raise an intersting point; That is the world currency accounts. If you look at the US dollar world accounts, foreign banks, international companies, and individuals, there is trillions upon trillions of US dollars, which is held against almost NO currencies on the other side of the ledeger. To date this has worked. The US dollar is the world currency, and till recently had vaule, but what "if". What if the US dollar goes "catonic", suffers a cerbral failure. What if the world instead of buying gold, US treasuries and US stocks, which to date has all occured, the world decideds to buy their own currency. The CDN and Auzy dollars are very thinnly traded, and very few exsist on the world currency accounts.Even the Euro which settles accounts within the Euro Zone is a thin currency, in comparison to the US dollar.. To date the US dollar is the only currency the world has needed or used. It would be like if everyone ate apples, and never ate oranges, so NO need to have any oranges, but one day all the apples get worms, and now everyone wants to eat oranges. What will the oranges be worth, when there is only a few for sale?? More importantly what will the Apples be worth??The world has to date never really bought currencies, instead they have bought gold or US treasuries, but that was then, and today in this global international business world, it's easy to invest in almost anything.

May 31 10:29 AM

[Speed racer64:]

Everyone forgets...We have the greatest military on the planet...do you really think we'd allow that to happen...thye tried that move in the Middle East...oh yeah we control that now....stop looking at the surface...digg a little deeper...Pan America is in full effect

May 31 10:53 AM

[Audio Tactics:]

Uhm, sorry to rain on your parade but the dollar is not going to collapse...

May 31 11:01 AM

[capital pains:]

The dollar will not collapse. There is no other currency that will ever take its place. And, contrary to the paranoid gold bugs, gold will never take its place either. We are not saying that the dollar's lofty position is warranted. We are simply stating a fact written in stone.
Contrary to our Chinese masters screaming, they have a vested interest in the dollar as does the entire world. Especially true, in our "less worse" environment. As hard as Chaiman Obama tries, he will certainly debase the dollar but not even the Chairman can destroy it. Although Obama and his band of merry men will do their
best to get it demolished .

May 31 11:21 AM

[mlyn:]

Forgive my naivete about economics, but why, why won't the dollar collapse? if not today, why not 10, 20 years from now if the current economic state of affairs continue, including black swan events. Is it just pure American hubris that the US dollar cannot, will not collapse. I would think many foreigners in positions of power around the world are asking themselves that question. Isn't the chink in the armor beginning to show?

May 31 11:59 AM

[lbsterling:]

A sharp correction in the dollar has been my fear and expectation for some time now.

However, I think you are either disingenuous or naive in suggesting that all the countries of the world holding dollars would try to dump them at once.

Instead, the central banks of countries holding dollars have almost certainly agreed with the Fed in intervene in a coordinated way to slow a dollar disintegation.

"Wal Mart...would be the first to go under."

Wrong and fear-mongering. China has no interest in seeing the dollar collapse and choke off its sales to WalMart / exports to the U.S.

If a dollar correction is inevitable _ as has seemed the case, although until recently it was failing to materialize _ the interest of dollar-holding countries is to ensure that it happens gradually in order to give producers *some* time to adjust to the new situation.

May 31 12:25 PM

[Tony Daltorio:]

You hit the nail on the head - it is just sheer American hubris to believe that the dollar will NEVER collapse.


On May 31 11:59 AM mlyn wrote:

> Forgive my naivete about economics, but why, why won't the dollar
> collapse? if not today, why not 10, 20 years from now if the current
> economic state of affairs continue, including black swan events.
> Is it just pure American hubris that the US dollar cannot, will not
> collapse. I would think many foreigners in positions of power around
> the world are asking themselves that question. Isn't the chink in
> the armor beginning to show?

May 31 01:06 PM

[LKofScotland:]

wal mart collapses? hmmm. doubtful. every other retailer on the planet maybe but i highly doubt they'll be the first to go. in other words you seem to be arguing that wal mart can't raise their prices whereas everyone else can. mr market has been screaming keep making that bet ever since the collapse and those who have been on the other side of that trade have done very well by it, too.

May 31 02:50 PM

[sarge 907:]

Not to fear, I'm putting my hard earned savings (meager as they are) into something harder than ink and paper.

May 31 03:03 PM

[EUARTE:]

I know your last sentence was an unintended pun!!


On May 31 11:59 AM mlyn wrote:

> Forgive my naivete about economics, but why, why won't the dollar
> collapse? if not today, why not 10, 20 years from now if the current
> economic state of affairs continue, including black swan events.
> Is it just pure American hubris that the US dollar cannot, will not
> collapse. I would think many foreigners in positions of power around
> the world are asking themselves that question. Isn't the chink in
> the armor beginning to show?

May 31 04:16 PM

[dirtyharry:]

In fact, historically, there has never been a fiat currency that has NOT collapsed over time. By the way, all of those "paranoid gold bugs" have seen their gold jump 43% since early October while the general markets are even AFTER a 35% "fool's rally". To learn more about why your comments illustrate how clueless you are, this article is an interesting read on the history of fiat currencies:

dailyreckoning.com/fia.../



On May 31 11:21 AM capital pains wrote:

> The dollar will not collapse. There is no other currency that will
> ever take its place. And, contrary to the paranoid gold bugs, gold
> will never take its place either. We are not saying that the dollar's
> lofty position is warranted. We are simply stating a fact written
> in stone.
> Contrary to our Chinese masters screaming, they have a vested interest
> in the dollar as does the entire world. Especially true, in our "less
> worse" environment. As hard as Chaiman Obama tries, he will certainly
> debase the dollar but not even the Chairman can destroy it. Although
> Obama and his band of merry men will do their
> best to get it demolished .

May 31 06:13 PM

[Dean Morel:]

I agree WMT is unlikely to be first to go under, but you may get a clearer view if you break free of your American-centric focus. Retailers in Australian and many other countries prosper when the USD falls. Their imports become cheaper, as they are priced in USD. What use is that? Well for starters an investment in retailers based in strong currencies, eg CDN and AUD, would diversify you out of USD and give you a shot at further prospering from a fall in USD.

For WMT you need only go back one year when the USD was tanking to see the effect on their business. I haven't done that.


On May 31 02:50 PM LKofScotland wrote:
> wal mart collapses? hmmm. doubtful. every other retailer on the
> planet maybe but i highly doubt they'll be the first to go.

May 31 07:01 PM

[Mauiwalt:]

I pulled all my money out of the bank and bought good old gold. Then my wife told me we had no food in the house. That's when I understood why the dollar is still wanted, needed and loved. You can't buy a big mac with an American Eagle or Maple Leaf.

Jun 01 12:18 AM

[badScooter:]

pricey sandwich.

Jun 01 12:33 AM